Save This Column - and Maybe Some Cash

July 28, 2005

A demographic tidal wave of aging baby-boomers, fast approaching age 65, is set to dive headfirst into retirement. A majority of them have worked hard for the past 40 years and, through diligent savings and some luck, have accumulated a modest but sizable nest egg.

Having enjoyed their lives so far, they plan on enjoying their retirement as well, and want to live relatively comfortably without worrying much about volatility in the stock market or the danger of running out of money. Complicating the retirement conundrum is the happy consequence of improved medical research and healthier lifestyles: They are living a lot longer than ever before.

The statistics are looking good. At this age, there's a 50 percent chance that the husband will live to 85 and the wife to 88. The wife has a 25 percent chance of living to 94 - almost 30 more years! Thirty years from now will be 2035. To put this into perspective, 30 years ago was 1975.

Let's stop and think about this. Do we even remember 1975?

Even if it's true that, in the scheme of things, life is achingly brief, for many of us 1975 seems like a long, long time ago. In 1975, the Flyers won the Stanley Cup, Dave Cash was the second baseman for the Phillies, and the Eagles' quarterback was Roman Gabriel. (If you recognize those names, you're probably not feeling that young right now).

Good News, Bad News …
Let's take a minute and ruminate on all that has happened since then. So let's pretend, looking back over this 30-year period, that we'd retired and not worked a day since 1975, relying solely on our savings to live up to today.

For certain lucky baby-boomers (or unlucky ones, depending on the point of view), that's the reality they're facing today. After all, the actuarial tables say that many people are going to live until they're 94, and some will live even longer than that.

So what are these omnipresent baby-boomers to do?

First, wisdom requires that they admit an uncomfortable notion: No one knows what's going to happen over the next 30 years, and there's no silver bullet that allows us to say, "Here is an absolute guarantee that you will never run out of money."

We can run models galore, tinker with variables, pore over actuarial tables and run so many spreadsheets that our computer starts spouting smoke, but nothing in this world can guarantee how the future will unfold. We don't know what the market is going to do, and we don't know when we'll die.

Sure, boomers could pick a safe allocation and watch as the market replicates the 1990s. Or they can pick an aggressive allocation, and watch in horror as the market tanks. Boomers could live 30 more years (let's hope!) or die tomorrow.

Traditionally, asset-allocation models call for individuals to reduce their stocks and increase their allocation to bonds as they get older. That's fine, but what about the 65-year-old retirees who may live another 30 years?

If they insist on spending 10 percent of their assets every year while investing in risk-free treasuries with a 4 percent yield, simple math says that over enough years, this mode of spending is simply not sustainable. These investors have avoided sharp stock-market drops while all but ensuring that they will gradually run out of money.

Baby-boomers uncomfortable taking risks can reduce their chances of running out of money during retirement by simply spending less.

Let's say an investor cuts spending by $5,000 per year for the next 30 years and invests it in a diversified portfolio of stocks and bonds, and during that time, this portfolio returns an annualized return of 6 percent per year. After 30 years, that's an additional sum of $395,290.

Otherwise, there's really only one other option to reduce a person's chances of running out of money - and it's not an option that most of us relish: Keep working!